Daniel Knowles writes for the Economist about politics and economics and is @dlknowles on Twitter.

The 50p rate is making money – but it won't forever

In our splash this morning, we report that David Cameron and George Osborne have finally ruled out cutting the 50p rate of tax in this parliament. The long-awaited report from HMRC, which had been expected to find that the tax is raising little to no revenue, is apparently going to show a "surge" in revenues. That, in combination with the weak state of the economy overall, means that cutting tax for the wealthiest is politically a non-starter – not to mention a silly policy in principle. It is right that "those with the broadest shoulders" (as the current cliché goes) should pay the most tax. Cut the 50p rate, and those impact assessments the IFS and the OBR keep producing – which already show that policy is fairly regressive – will suddenly look brutally unfair on the poorest.

But as my colleague Benedict Brogan suggests, that doesn't mean that the Conservatives shouldn't be trying to cut the rate at some point.

So far, the debate over whether or not to slash taxes has been far too crude. The Right has alleged that such a high marginal rate of taxation deters "wealth creators" – high-powered entrepeneurs, MBA students and so on – from staying in this country and paying any taxes at all. The Left says that's rubbish. The problem is, however, that both can be right. The Left is right in the short run, but the Right is right in the long run.

The tax take is maximised at the top of the "Laffer curve". The logic of the Laffer curve is simple: at a 0 per cent rate of taxation, you collect nothing, and at a 100 per cent rate of taxation, you collect nothing. Therefore, at some point between 0 per cent and 100 per cent, there is a revenue maximising tax rate. Indisputable, right? The debate is over where the peak is.

In practice, no one really knows, but it is likely that the peak moves leftwards (on the graph) over time. If you are taxed at 50 per cent – or even 90 per cent – for a year, you are very unlikely to move to Switzerland. Moving is expensive and tedious, and at the end of it, you live in Switzerland. Moreover, jobs aren't lost when individual bankers choose to set up in Geneva; they are lost when companies decide that they can do better business in Switzerland. In the short run, people who move abroad will be easily replaced. So the idea that the 50p rate would instantly start cutting tax revenues was, from the beginning, supremely silly.

But over time, a higher rate of taxation will begin to cut into the City's competitiveness. Banks based in London recruit from all over the world, and they are very picky. Helped by global communications and cheap flights, people are more geographically mobile than ever before. If the 50p rate of taxation cuts the salary that bankers can expect to earn in London, then fewer people will want to move here, and so firms will find it harder to recruit. If some firms move overseas, others will follow. Given that financial services generate an export surplus of 3 per cent of GDP, that's not something we want to risk. And by the time we definitely know it's happening, it may be too late to reverse.

So that's why David Cameron is right to keep the 50p rate and also right to maintain that it is temporary. As long as it is to be cut eventually, it won't do much damage at all; it's only if it becomes truly permanent that it will hurt. The only problem is whether anyone still believes him.